'The PPF is a business stealth tax'

"It was a scandal that men and women, who lost their jobs when firms went under, lost their pensions too." So said Gordon Brown last week to Labour's party conference in Brighton.

During the chancellor's speech, a dozen naked men stood on the beach clutching a banner which said "Stripped of our Pensions". They represent some of the 85,000 workers who lost final-salary pensions when their firms went bust.

In mid-2004, ministers finally agreed to compensate such workers. But almost 18 months on, the Government's Financial Assistance Scheme has yet to pay out a penny.

The FAS, in theory, only underpins pensions in firms which went bust before April 2005. Scheme failures since then are backed by the new Pension Protection Fund created earlier this year. And, while the FAS is Government-backed, the PPF is funded by business - via compulsory payments from firms with final-salary schemes.

That distinction is crucial. It became especially so the day after Brown's speech, when news emerged that the liabilities of Turner &Newall's scheme would fall not on the FAS, as expected, but on the PPF.

Suddenly, the burden of the T&N scheme - with its 37,000 members and £875m deficit - had been transferred from the public sector to the private sector: companies will foot the bill.

"We feel completely let down," says Sir Digby Jones, the CBI director general. "When the PPF was formed, and business agreed to pay for it, the Government said it wouldn't include pensions at firms like T&N. Ministers have reneged on that deal. They've placed such a strain on the PPF that I fear the safety-net will break".

Jones's point is that T&N - a once-proud car-parts maker - went bust back in 2001. So the scheme falls squarely on the FAS. But the situation is complex. T&N became insolvent after its US-parent company, Federal Mogul, went bankrupt to protect itself from massive asbestosis claims.

For four years, T&N's administrators under British insolvency procedures have been locked in negotiations - not least with Carl Icahn, the legendary US corporate raider and Federal Mogul's biggest bondholder. The administrators have secured a £250m cash-injection for the pension fund - way above Icahn's original offer.

Anyway, ministers were able to put T&N into the PPF using a quirk of bankruptcy law. Effectively, T&N will soon become insolvent for a second time.

That's what gets the FAS - and the Exchequer - off the hook. "Ministers have engi-neered this so business foots the bill," says Jones. "Paying for T&N will push PPF levies up further, encouraging even more schemes to close. The PPF is becoming another business stealth tax".

John Ralfe, a pensions expert from RBC Capital Markets, thinks Jones "has good reason to be upset". But he says "overall, the T&N episode is turning out better than expected".

Ralfe calculates the businesses paying for the PPF will now spend £125m supporting T&N pensions. "It could have been much higher," he says. "But the administrators dug in their heels against Icahn and extracted more money."

T&N scheme members will still lose around £500m - equivalent, on average, to around 25 per cent of their expected pensions.

But there's a broader issue here. Since the PPF opened in April, it has absorbed losses, including T&N, of around £650m - overwhelming the £300m it annually collects in levies on business.

If PPF levies stay where they are, the safety net risks being overwhelmed by a succession of busted schemes. In its first six months, the volume of claims - including the MG Rover and Heath Lambert schemes - has been truly alarming. So last week's goose-pimpled Brighton protesters could soon find themselves on a crowded beach.